Wayfair Sales Tax Case

You may have heard that last month, the U.S. Supreme Court sided with the State of South Dakota against online sellers Wayfair, Overstock.com, and Newegg in a case that is commonly referred to as the “The Wayfair Case”. The primary focus of the case centered around a state’s right to force out-of-state sellers, without a physical presence in the state, to comply with their sales tax collection laws.  

Since a 1992 Supreme Court Decision (The Quill Case), states have not been allowed to force companies, without a physical presence in the state, to comply with their sales tax laws.  Quill is an office supply company, who at the time was selling primarily via catalogs, national ads, and telephone calls. The court ruled that Quill was not subject to the North Dakota sales tax laws, because they lacked a physical presence in the State of North Dakota. 

With the passage of time and the continued development of online retailing, 41 states, two territories, and Washington D.C. have all requested the court to review the standard established under Quill.  The Wayfair case focused around South Dakota’s enactment of a“Kill Quill” bill in which the State forced any company with more than $100,000 in sales revenue or 200 “transactions” of taxable products delivered into the state to collect and remit Sales and Use tax. 

Because most States have already enacted a Use tax provision (or something similar) the Wayfair case shouldn’t change the amount of tax required to be paid to any individual state.  It may, however, change who is responsible for making sure the tax is collected and paid.  Use tax provisions generally require the purchaser to voluntarily report and pay the tax.  Wayfair shifts that burden to the seller, which most states believe will ultimately generate more revenue to the state.  Studies have historically shown that Use tax is greatly underreported by purchasers. 

The Wayfair case could fundamentally change how sales and use tax are collected over state lines. The question is, “How will the rules evolve?”  Some states have already adopted the $100,000 and 200 transaction tests used by South Dakota. Both the opinion of the Quill case and in the dissenting opinion of Wayfair suggested that Congress should resolve this issue. 

It is too early to tell how this may ultimately be resolved.  If your organization has out-of-state retail sales, please contact a FMD representative at your earliest convenience to discuss how Wayfair may affect your organization.